Negotiations and Crown Land Sales

In Canada's sedimentary basins, the provincial and federal governments own the mineral rights under most of the land. If mineral rights are freehold, company landmen negotiate directly with the owner to acquire a petroleum and natural gas lease. If the rights are already held or leased by another company, the landmen will still have to acquire the rights by negotiating an agreement with the owner. Often the company will undertake exploration, usually by drilling a well, in exchange for an interest in the mineral rights and production. This type of agreement is known as farmount. If the Crown mineral rights are not currently leased, the company must apply to the appropriate government owner to have the rights listed or posted for competitive bidding at a land sale.

Based on its economic calculations, the company then submits a bid to the government or other mineral rights owner. The company with the highest bid obtains an exploratory permit, licence, or lease. The amount paid at auctions for Crown mineral rights is known as a bonus payment. Whether freehold or Crown, the owner of mineral rights also receives a royalty, which is a share of production or equivalent revenue.

The terms of permits, licences or leases generally require that the holder begin exploration activity within a specified period. If a company cannot afford the work or wants to reduce the risk, its landmen may farm out the land to others who will earn a share of production by undertaking exploration. At the end of the initial term of the lease, if the land has been drilled and oil or gas found, then the rights are held down to the deepest formation proved to be capable of production. The rights below that formation are returned to the Crown to be posted for future Crown land sales. This is referred to as "deep rights reversion."

Petroleum Communication Foundation. Our Petroleum Challenge: Exploring Canada's Oil and Gas Industry, Sixth Edition. Calgary: Petroleum Communication Foundation, 1999. With permission from the Centre for Energy.